ANALYZING A TENANT’S CASE FOR RENT RELIEF DUE TO THE COVD-19 PANDEMIC

 

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 ANALYZING A TENANT’S CASE FOR RENT RELIEF DUE TO THE COVD-19 PANDEMIC

April 20, 2020, by Tom Stewart

There is a lot of chatter about “force majeure” clauses these days in the world of commercial real estate (a recent Google search showed almost 55,000,000 results for “force majeure”; variations on the phrase yield billions of hits).  Many Tenants are rushing to the conclusion that they must be entitled to rent relief, whether the Lease makes any mention of it or not, given the Governor’s stay-at-home order (Executive Order N-33-20), based on the doctrine of force majeure. The law in this area, is, however, a bit more complicated than that. The purpose of this article is to give a brief overview of the relevant law, and to suggest a disciplined approach to analyzing the Tenant’s case for rent relief.  In a nutshell, you should: (i) analyze the Lease’s force majeure clause (if any), (ii) apply the common-law doctrine of “commercial frustration” to the particular circumstances of the Lease, and (iii) consider the effect of the recently passed ordinances that limit tenant eviction

I.     FORCE MAJEURE CLAUSES

  • Does the Lease contain a force majeure clause at all?
  • Here’s an example of a simple, typical force majeure clause, appearing in Landlord office Lease:  “Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant (other than the payment of the Security Deposit or Rent), the period of time for the performance of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor or materials, war, terrorist acts, civil disturbance, and other causes beyond the reasonable control of the performing party (“Force Majeure”).
  • Tend to be narrowly construed under California law, because invoking a force majeure clause has the effect of negating key elements of a negotiated contract.  If events like “pandemic” or “epidemic” or “government action” aren’t specifically enumerated as being force majeure events, they may not qualify at all.   Notice that the clause above makes no mention of concepts that would be relevant to the current situation, such as “widespread epidemic or pandemic, or public health emergency” or “stay-at-home orders.” (No doubt those phrases will be added to future Leases.)
  • Typically carve-out the obligation to pay rent, and if even they don’t, a court could so interpret the provision; in other words, if the force majeure clause is silent as to its effect on rent, it may not excuse rent payment.
  • The force majeure event cannot be the fault of the party relying on the provision, and must truly interfere with performance.
  • Whether the Governor’s Executive Order N-33-20 qualifies as a force majeure event under a particular Lease (or for that matter, whether it excuses the Tenant’s performance under the “commercial frustration” doctrine discussed below) is dependent on the particular circumstances of each Lease and each Tenant.  The duration of the current shutdown will be a critical factor in any event.
  • The Tenant is often required to give prompt notice to the Landlord of the Tenant’s inability to perform.
  • The AIR CRE Lease forms do not include a force majeure provision (at least not the ones that I have recently reviewed), and contain no clause that states a clear grounds for rent relief due the current pandemic and stay-at-home order, in my opinion.  It has been suggested that the “Hazardous Substance Condition” and “Abatement” provisions appearing as section 9.1(e) and 9.6 of the Multi-Tenant Office Lease-Gross form may be relevant, but I don’t think that the coronavirus qualifies as a “Hazardous Substance,” as defined in that Lease.  And to the contrary, there is at least one clause in that Lease that suggests the risk of government action that renders the space unusable has been allocated to the Tenant; see Section 11.5, which provides:  “11.5   Interruptions.  There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

II.     COMMERCIAL FRUSTRATION DOCTRINE

  • Even if there is no force majeure provision in the Lease, the doctrine of “commercial frustration” may nonetheless excuse a party’s obligation under a Lease.  This is a common-law doctrine, which has been codified by California Civil Code section 1511.  The relevant portion of that statute excuses a party’s contractual obligations when it is prevented “by the operation of law.”
  • In Dorn v. Goetz (1948) 85 C.A.2d 407, 193 P.2d 121, the court expressed the doctrine as follows:  “Performance remains entirely possible, but the whole value of the performance to one of the parties at least, and the basic reason recognized as such by both parties, for entering into the contract has been destroyed by a supervening and unforeseen event.  This does not operate primarily as an excuse for the promisor, the performance of whose promise has lost its value, but as a failure of consideration for the promise of the other party, not in a literal sense it is true, since the performance bargained for can be given, but in substance, because the performance has lost its value.”
  • The Tenant’s best argument, therefore is:  since I can’t use the Premises due to the stay-at-home order, the Premises are of no value to me.  There’s a related argument, to the effect that the pandemic is an unforeseen event that makes it difficult or impossible for the Tenant to pay rent, but that’s not as compelling an argument.
  • Many of the reported decisions interpreting commercial frustration arose from the government’s policies during WWII; in many of those cases, the party seeking relief was denied.
  • The case law makes it clear that for the Tenant prevail would have to (i) prove that either (x) they cannot use the Premises at all, or (y) the current pandemic is the cause of its inability to pay rent (again, I think that’s the weaker argument), (ii) the pandemic was not foreseeable and not foreseen by the parties, and (iii) provide the Landlord with written notice of its intention to claim an extension of time to pay rent.

III.    CONSIDER THE IMPACT OF NEW LAWS AND ORDINANCES

  • At the State level, the Judicial Council of California has suspended ALL evictions.  This will stay in effect until 90 days after the Governor declares that the state of emergency related to the COVID-19 pandemic is lifted.
  • Many California counties and cities have also enacted bans on commercial evictions.  The Sacramento ordinance is discussed below, but there are also bans in West Sacramento, Davis, and Stockton.  Most of those ordinances are similar to Sacramento’s; they put the onus on the Tenant demonstrate that their inability to pay is due to the COVID-19 pandemic, require documentation, and that the Tenant pay what they can

IV.     SACRAMENTO CITY’S TEMPORARY MORATORIUM ON COMMERCIAL EVICTIONS

The State of California (see Governor’s Executive Order N-37-20) and Sacramento County have residential eviction moratoria in place, but the Sacramento City ordinance passed on March 25 applies to both commercial and residential Tenants.

Some Highlights of the Sacramento City Ordinance:

  • If a Tenant intends to delay the payment of rent based on the ordinance, bear in mind the following requirements:

1.  The Tenant is only eligible if they have suffered a loss of income due to “closure, operating restriction placed upon, or other loss of patronage of the Tenant’s business directly resulting from (i) the state‐declared emergency, locally‐declared emergency, or county stay‐at‐home order described in Section 1 of this ordinance; or (ii) any other emergency declarations or orders related to COVID-19.”

2.  In order to take advantage of the ordinance, the Tenant must:

a)  notify the landlord in writing before the rent is due that the Tenant has suffered a loss of income due to COVID-19 and will be unable to pay the full amount of rent due;

b) provide the landlord with verifiable documentation to support the loss of income claim.  Documentation might include copies of payroll checks or revenue receipts, a supervisor’s or owner’s statement of a reduction in business to support a reduction in Tenant income, or the business owner’s declaration the business closed to comply with an order; and

c) pay the remaining portion of rent owed that the Tenant is able to pay based on the amount of income received.

  • Note that the notification and related support documentation must be provided each month in which there will be a delay in payment.
  • The obligation to pay rent is in no manner reduced—it is simply deferred.  All unpaid rent still has to be paid to the landlord, not later than 120 days after the Governor’s Executive Order N-28-20 has expired (the current expiration date is May 31, 2020).
  • Note that the Ordinance in no manner excuses the Tenant’s non-rent obligations.  Obligations such as operating covenants, use restrictions, and insurance requirements, for example are not covered by the ordinance.

SOME RESOURCES:

My partner Winnie Ward posted an article on our website; it has a nice list of “dos” and “don’ts” for Landlords:

Another article by my partner Winnie Ward:

The law firm of Cox Castle maintains a comprehensive database, with hyperlinks to the actual ordinances, of all the evictions bans enacted by cities and counties in California:

The original (residential) Sacramento City ordinance:

The March 25 amendment extending the Sacramento City ordinance to commercial tenants:

FAQ document relating to the Sacramento City ordinance:

Status of County Recorder Services, from Old Republic Title:

Judicial Council suspending ALL evictions:

DISCLAIMER:  This article does not constitute legal advice.  Readers should consult with their own legal counsel for the most current information and to obtain professional advice before acting on any of the information presented.

BIOGRAPHY:   Tom Stewart is a named partner of Stewart Ward & Josephson LLP.  He specializes in commercial real estate transactions, and can be reached at tstewart@swjllp.com; 916-569-8121.

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